LNG SPECIAL REPORT: LNG – bunker of the future?

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A SURVEY by professional services firm Deloitte has found shipping companies favour using LNG as a bunker fuel to meet emissions reduction targets.

The survey of more than 80 senior energy leaders from across the Asia Pacific region showed that LNG is the preferred fuel to meet the International Maritime Organization’s new international emissions standards for marine bunker fuels.

However, a lack of refuelling and bunkering infrastructure has been identified as the key barrier to the large-scale adoption of LNG as a transport fuel. The new IMO rules will cut the allowed sulphur content in marine fuel from 3.5% to 0.5% in January 2020.

The Deloitte survey was conducted during a trading summit in May, which attracted 85 c-suite attendees from across the oil and gas industry.

Survey respondents cited the retrofitting and/or redesign of the existing shipping fleet to accommodate the LNG bunker fuel option as the second-biggest barrier to adoption, followed by the price competitiveness of LNG versus liquid fuels. However, despite the challenges, more than two-thirds (68%) said if the marine fuel market switched to LNG, it would have a positive effect on their overall business.

The table below shows the responses of survey participants to the question: “Which solution will likely be adopted by shippers under the stricter IMO regulations that cap sulphur content at 0.50% m/m by 2020?”

“This is important from a public health perspective. Air pollution from ships contributes to ground-level ozone, acid rain, air particulates and water deterioration,” Ms Cullinane said.

A recent Chinese study found at least 24,000 premature deaths per year in East Asia were related to air pollution from ships. Global shipping accounts for 2-3% of emissions and, without additional climate measures, will be responsible for up to 14% by 2050.

“The desire for cleaner fuels is creating a worldwide market for LNG as a marine fuel,” Ms Cullinane said.

LESS SOx AND NOx
According to Deloitte, the use of LNG as a ship fuel will cut sulphur oxide (SOx) emissions by 90-95%, cut CO2 emissions by 20-25% and compared with HFO, LNG emits up to 90% less nitrogen oxides (NOx). LNG also produces virtually zero particulate matter (PM).

The Energy Efficiency Design Index (a shipping environmental footprint benchmark) is estimated to improve by an average of 20% if LNG is the main fuel compared with ships running on HFO.

“Rather than an interim solution, LNG is being seen by the market as a long-term low emission marine fuel solution. LNG-fuelled ships offer a credible and cost-competitive path to decarbonisation and improved air quality,” Ms Cullinane said.

“LNG is undoubtedly gaining traction among freight and cargo shippers; the IMO’s new environmental standards effectively give them little choice.

“While options like HFO + scrubbers comply with the new shipping environmental standards, they are regarded as temporary, sub-optimal solutions. LNG is virtually sulphur-free.”

There is also an economic advantage to using gas. LNG is expected to be a less expensive option than marine gas oil or low-sulphur fuel oil in a high oil price environment.

For all its clean energy credentials, LNG isn’t totally emissions-free. It can meet the 2020 low sulphur fuel demands, but crucially not zero-emission demands, which is the way the shipping industry may be going.

“LNG is not able to deliver the GHG [greenhouse gas] reductions in the IMO’s initial strategy for GHG mitigation, and the Paris climate change goals more generally,” Ms Cullinane said.

“It’s for this reason that LNG’s role in shipping’s transition to a low-carbon future may only be part of the solution.”

Ms Cullinane says the “inflection point” for LNG uptake as a low-emission marine fuel supply option is closer than ever.

“Faced with increased supply competition and pricing pressure in their core markets, LNG producers are eager to get exposure to new revenue streams,” she said.

Many bunker ports in the world are expected to have LNG capabilities in place by 2020. According to SEA\LNG, a multi-sector industry coalition, nine of the top ten oil bunkering ports already offer LNG or have firm plans to do so by 2020. Singapore is planning to be LNG bunker fuel ready in the same timeframe.

“Critical mass is fast approaching,” Ms Cullinane said.

“There are large-scale LNG terminals in proximity to 24 of the world’s top 25 ports ranked by trade volume”.

Orders for LNG-powered ships increased 36% year-on-year in May 2018. As of 1 May 2018, the world fleet totalled 253 LNG-fuelled vessels, consisting of 121 ships in service and an additional 132 on order.

“At the customer end of the market, ship owners are playing more of a ‘wait and see’ game in terms of their response to the new IMO emissions standards,” Ms Cullinane said.

“They are still evaluating the merits and costs of the various fuel options – primarily low-sulphur marine gas oil, LNG and the continued use of HFO with an exhaust gas scrubber.”

While LNG’s low emissions criteria are quite well understood, there are other costs associated with switching to an LNG based shipping infrastructure. LNG-fuelled vessels are priced at about a 20% premium relative to vessels running on HFO. This is due to the costs of dual-fuel engines, LNG bunker tanks, and fuel gas supply systems.